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5 Differences Between Roth and Traditional 401(k)s


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Withdrawal Taxation
Choosing a Roth 401(k) could mean more money at retirement -- which you could use to start that bookstore you've always wanted to own. monkebusinessimages/Stockbroker/Thinkstock
Choosing a Roth 401(k) could mean more money at retirement -- which you could use to start that bookstore you've always wanted to own. monkebusinessimages/Stockbroker/Thinkstock

Here is where the rewards come in when you have a Roth 401(k) -- when it's time to withdraw your savings and subsequent investment gains. Because you paid taxes on your earnings before you siphoned some of that money into your Roth 401(k), no taxes are levied when you withdraw funds, assuming you've held your account at least five years and the withdrawal meets certain criteria. Federal and most state income taxes are levied when you take your money and its earnings from a traditional 401(k) plan, since your deposits weren't taxed when you first made them [source: Internal Revenue Service].

Does it make a difference when your money is taxed? Possibly. If your tax rate is the same percentage during retirement as it was while you were employed, you'd probably end up with the same amount of money whether you had a traditional or Roth 401(k) [source: Ensign]. But if your tax rate is higher at retirement, a Roth 401(k) may be your best bet. If it's lower, a traditional 401(k) will likely net you a better payoff. Of course, who can predict what their tax rate will be in the future, especially if retirement is many years away? Some people hedge their bets by splitting their retirement money between the two options.

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